Europe’s tax war with the tech giants

The European Parliament will vote on a reform in March to impose a common corporate fiscal system for all companies operating physically or virtually in Europe

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Facebook has its biggest headquarters beyond the US in Dublin due to favorable tax conditions.Carlos Martínez
Alicia González

At a distance, Dublin’s skyline is defined by a forest of cranes. Everywhere you look, vast buildings are being put up. This is not Dublin’s first construction boom – before the financial crisis, there was another property frenzy, primarily of a residential nature. This time it is in response to foreign demand for office space.

Along the old docks, close to the port, is Dublin’s EU-financed answer to Silicon Valley. This is where Google, Facebook, Airbnb, LinkedIn and Twitter have their headquarters – in many cases their biggest base outside the US. The trend has brought employment back, but at a price. According to Sean Whelan, Economic Correspondent for Irish broadcaster RTÉ: “Rents have shot up across the city, exacerbating the housing shortage and pushing people out of the center.”

15% of Ireland’s revenue comes from corporate taxes

There are plenty of reasons why foreign companies choose Ireland: it is English speaking, the population is young and well educated, its legal system is compatible with that of the US, it is an EU member state and its pharmaceutical regulations are acceptable to both Brussels and America. In fact, with firms such as Abbot, GSK and Pfizer, the pharmaceutical sector is the country’s biggest exporter.

But the decisive factor is arguably the base corporate tax rate, which stands at 12.5% and can be reduced further should the company reinvest profits in research and development. This contrasts sharply with an average corporate tax rate of 23% elsewhere in the world and 18.35% in Europe, according to the Tax Foundation. Ireland’s tax policy has attracted its share of criticism. Dutch Euro MP, Paul Tang, for example, has accused Google of paying 9% for its sales outside the EU and a paltry 0.82% for those within the EU. In the case of Facebook, this figure drops further to 0.1%. “Ireland and Luxembourg are tax havens,” Tang said, addressing the Irish Parliament. “They are stealing revenue from other EU member states.” According to Tang, these countries’ negligible corporate tax meant a loss for the rest of Europe of €5.4 billion between 2013 and 2015.

Fifteen percent of Ireland’s revenue comes from corporate tax, compared to an average 8% in the rest of Europe. It is one of Ireland’s pillars of recovery – one it will be loathe to lose, particularly now that Brexit will make its beef and agricultural exports to the UK more expensive. “The tax advantage is very important and I think the government is right to be worried about the European Union encroaching on our ability to decide what tax policies we consider to be better for us,” says Frank Barry, International Business and Economics lecturer at Trinity College, Dublin.

With the current US administration, there is the danger of sparking a trade war Trinity College economic lecturer Frank Barry

Digital presence

The EU’s Economic and Monetary Affairs Committee has just voted in favor of a reform to standardize corporation tax, making tax regulation for all companies in the EU the same. With respect to digital business, eurodeputies want to introduce the concept of “digital presence” whereby tax will be calculated according to how much internet activity is registered in a member state, irrespective of where the company has its headquarters. This, according to the EU Parliament, will end the current practice of companies choosing to set up their headquarters in countries with a low corporate tax rate. Designed to create a 21st-century tax system for a global and digital economy, the reform will be voted on by the European Parliament as a whole at the March plenary session. Subsequently, the matter will be in the hands of the Commission and the EU’s heads of state. It will be a tough reform to push through as the treaties stipulate that decisions on tax policy need unanimous approval.

The fact is that current corporate tax policy is outdated. Drawn up to address the economic reality of the 1920s when businesses had a physical or legal presence in local markets, its relevance is on the wane – a system requiring companies to pay where they generate profits is not so easy to apply when their activities entail rapid cross-border capital flows.

Euro MPs want to tax tech giants based on how much data has been used in a member state

“We want a fair tax system for the digital giants that will create value in Europe for 2019,” said French Finance Minister Bruno Le Maire in a recent interview. “It’s neither possible nor sustainable that we tax industry while thousands of millions in profit from the technological sector evaporates from European soil.” Le Maire wants to see a reasonable percentage of tech-generated revenue invested back into the infrastructure of the countries where the profits have been made.

On another front, should it go through, the reform risks infuriating Donald Trump’s White House. “The US sees European efforts to tax companies working within the digital economy as a direct assault on the competitive edge of their companies and, particularly with the current US administration, there is the danger of sparking a trade war,” says Barry.

A question of national interest

Ireland is one of the most pro-Europe countries in the EU. Approximately 87% of the population feels positive about Europe, according to the Euro-barometer, while only 12% believe that Ireland should follow Britain’s lead and leave the union. But that could all change if their tax policy is undermined.

“I hope politicians in Brussels are taking this into account,” says Barry. “If the capacity of Ireland to attract multinationals is weakened by actions taken by the European Union, and if Ireland’s commitment to the EU weakens as a result and Ireland follows Britain or tries to negotiate some halfway house between Britain and the EU, then there is no doubt the economic bonds holding the EU together will become more fragile.”

This possibility has not escaped the former UKIP leader Nigel Farage, who initiated the demand for a referendum in the UK on Europe. Farage has spent the last few months campaigning in Ireland for a referendum there, so far with little success.

English version by Heather Galloway

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